Form 2553

Introduction

Form 2553 is a tax document that child care business owners can submit to the IRS at the beginning of the year to classify the business as an S corporation. Declaring your business as an S corporation allows you to change the way your business is taxed, resulting innumerous tax advantages and financial benefits. As an S corporation, you can take advantage of pass-through taxation, reduce self-employment tax, and maximize deductions for business expenses. To qualify, you must meet the necessary requirements, fill out the form correctly, and comply with ongoing obligations. This guide will show you how to best classify your business and take full advantage of the benefits that come with being an S corporation as well as walk you through filling out and submitting Form 2553. Also provided is guidance on how to remain in compliance in your new business classification.

Why Should I File a Form 2553 and Classify as an S corporation?

Form 2553 is an IRS form used by eligible businesses to elect S corporation status for federal tax purposes. The form should be completed within two months and 15 days after the beginning of the fiscal year of which the classification would go into effect. For most child care providers, the fiscal year starts January 1st. In this case, the form would be due by March 15^thin order to be classified as an S corporation for that year. S corporation status is typically the most advantageous classification for small businesses because of the variety of tax advantages, benefits, and flexibility it offers.

Pass-Through Taxation

Pass-through taxation means that your business profits and losses pass through to the individual tax returns of the owners of the business. This means that any money made or lost for the year is reported on your tax return as the business owner. You will be taxed on the income at your individual tax rate. Pass-through taxation is in place of corporate taxation, where the business itself would pay federal income tax on its profits at the corporate income tax rate in addition to the taxes you would pay on the profits that would be reported as your income. Corporate taxation has you paying taxes on your business profits twice. If your business is classified as an S corporation, you qualify for pass-through taxation which, allows you to skip the initial corporate tax.

Reduction of Self-Employment Tax

If your child care business is classified as a sole proprietorship or a partnership, you’re likely subject to paying self-employment tax, a tax that is meant to cover your Social Security and Medicare contributions. As an S corporation, you are required to pay yourself a reasonable salary. This salary is subject to self-employment tax. Any additional income earned beyond the reasonable salary can be classified as distributions—payments made from the profits of a business—and are exempt from the self-employment tax.

It is important for you to distinguish between your reasonable salary and the distribution of profits. By paying yourself a reasonable salary and taking the rest of your income as distributions, you can reduce your self-employment tax. You are required to pay yourself a reasonable salary first. The IRS does not specify an amount for this salary, therefore, be sure to discuss this with a tax professional to ensure that you remain in compliance with the IRS.

Potential Tax Deductions

As an S corporation, you can deduct ordinary and necessary business expenses when calculating your taxable income. Ordinary and necessary expenses are those that are incurred in the ordinary course of and are essential to operations. For example, deductible expenses for a child care business could be:

Employee salaries and wages
Rent or lease payments
Utilities including electricity, water, and heating
Advertising and marketing costs
Meals and snacks for children
Materials like toys, art supplies, books, etc.

Deducting expenses reduces your taxable income, which lowers the amount of taxes you’re paying. An S corporation’s expenses are deducted from profits before they’re paid to business owners. It’s important to keep proper records and documentation to support your deductions and consult with a tax professional to ensure that you remain in compliance with tax laws.

How do I fill out Form 2553?

Information Needed

Electing to be classified as an S corporation requires information about the shareholders of your business, including their names, addresses, Social Security Numbers, and dates of birth. You will also need their percentage of ownership of your business and their permission to make the election. If you are the sole owner of your business, you will only need your own information.

You will also need to provide basic information about your business such as the Employer Identification Number, business name, and address.

Steps for Filing

To start, download and print a copy of the form from the IRS website.

Once you have the documents, go through the following steps to fill out Form 2553:

Fill out the top section of the form: This includes your corporation's name, address, EIN, date of incorporation, and tax year.
Indicate the effective date of the election: Indicate the date you want the S corporation election to take effect. This date can be no more than two months and 15 days after the beginning of the tax year in which the election is made.
Indicate the type of corporation: Check the box indicating the type of corporation (domestic or foreign) and the type of entity (C corporation or other entity).
Indicate the shareholders' consent: Check the box indicating that the shareholders have consented to the S corporation election and provide the date of the shareholder meeting where the consent was given.
List the shareholders: List the names and addresses of all shareholders and the number of shares of stock they own.
Provide other information: Provide any other information required by the form, such as the name and address of the corporation's principal officer.
Sign and date the form: The form must be signed and dated by an authorized officer of the corporation.
Submit the form: Submit the form to the IRS within 75 days of the date of incorporation or at the beginning of the tax year for which the election is to be effective.

What Comes Next?

Once you are classified as an S Corporation, you need to be mindful to complete all necessary steps to remain in compliance with the IRS to maintain your classification. To do so, you must:

Hold regular shareholder meetings to remain in compliance with your incorporated status
Maintain accurate corporate and financial records
File annual tax returns
Pay all owners a reasonable salary
Ensure that shareholders report their portion of your business’s profits on the K-1 form
Be aware of and comply with any state and local requirements

Above all, it is important to consult with a tax professional to ensure that filing out Form 2553 and electing to be classified as an S-corporation is the best choice for your business, and that they help ensure you are taking the proper steps to remain in compliance with your new S corporation status.

Helpful Tools:

What is a 1099?

What is a Capitalization Policy?

Questions?

If you have any questions, you can reach out to the Texas Workforce Commission-Child Care Coaching Team at Coaching@ECEBixCoach.org.

DEVELOPED AND DESIGNED BY CIVITAS STRATEGIES

Disclaimer: The information contained here has been prepared by Civitas Strategies and is not intended to constitute legal, tax, or financial advice. The Civitas Strategies team has used reasonable efforts in collecting, preparing, and providing this information, but does not guarantee its accuracy, completeness, adequacy, or currency. The publication and distribution of this information are not intended to create, and receipt does not constitute, an attorney-client or any other advisory relationship. Reproduction of this information is expressly prohibited. Only noncommercial uses of this work are permitted.